Summary

When is an irrevocable trust revocable? The recently adopted Uniform Trust Code (UTC) was supposed to make all of this more clear, but a recent case in New Mexico has muddied the waters for all practitioners.

In the pre-Uniform Trust Code UTC), unless the terms of a revocable inter vivos trust provided otherwise, the trust could not have been revoked by the settlor’s will. A will speaks at the time of the testator’s death, an event that happens also to render the trust irrevocable. See, e.g., Brown v. International Trust Co., 130 Colo. 543, 278 P.2d 581, 583 (Colo. 1954) (en banc).

Section 602(c) of the UTC has turned this settled doctrine on its head and generally muddied the waters in the process. In its original manifestation, § 602(c) provided as follows: “The settlor may revoke or amend a revocable trust: (1) by substantial compliance with a method provided in the terms of the trust; or (2) if the terms of the trust do not provide a method or the method provided in the terms is not expressly made exclusive, by: (A) executing a later will or codicil that expressly refers to the trust or specifically devises property that would otherwise have passed according to the terms of the trust; or (B) any other method manifesting clear and convincing evidence of the settlor’s intent.”

By amendment to the UTC in 2001, the word “executing” was deleted “to avoid an implication that the trust is revoked immediately upon execution of the will or codicil and not at the testator’s death.” Quaere: What if we are in a jurisdiction where a will with a trust-revocation provision may be executed (signed by the witnesses) after the settlor has died, as per § 2-502 of the Uniform Probate Code?

Now comes In re Schlicht, 2014 WL 1600914 (N.M.App), a trust-revocation case decided last month (April 17, 2014), that further muddies the waters. New Mexico has enacted the modified version of UTC § 602(c). The trust at issue expressly provided that the settlor may revoke the trust “by a duly executed instrument to that effect, signed by the [settlor] and delivered to the Trustee.” The will had an express partial trust-revocation provision. The Court held that the revocation-by-will was effective, notwithstanding the express language of the trust, which the court deemed to be non-exclusive. Here is the Court’s rationale: “…[T]he will executed during the settlor’s lifetime constituted substantial compliance with a method provided in the terms of the trust.” It should be noted that Massachusetts has declined to enact the substantial compliance and revocation-by-will features of UTC § 602(c). It has, however, adopted the vaguely-worded “any other method of revocation” feature.

Acknowledging the uncertainty that is baked into § 602(c), the UTC has thrown a bone to the trustee community. Section 602(g) provides that “[a] trustee who does not know that a trust has been revoked or amended is not liable to the settlor or settlor’s successors in interest for distributions made and other actions taken on the assumption that the trust has not been amended or revoked.” What if the trustee should have known? In any case, what about the other parties to the trust relationship? And what about those of us who are their legal advisors? It is suggested that the settlor of a revocable inter vivos trust would be well-advised to give UTC § 602(c) the widest possible berth by expressly providing in the terms of the trust an unambiguously-exclusive method of revoking it, and by requiring that compliance be literal.

UTC’s abolition of the presumption that an inter vivos trust starts out irrevocable is “regrettable.” I suspect that over time more unwary practitioners will run into trouble due to the presumption of revocability than ever ran into trouble due to the presumption of irrevocability. Think creditors, taxes, and welfare. The other problem with the abolition is that equity is now going to have to develop a complementary doctrine of implied or constructive revocation. (In re Schlicht is just the beginning of the process, which will take years before things settle out). An inter vivos trust instrument that contains no revocation clause and no express declaration of irrevocability perforce will contain no express method for exercising the Settlor’s UTC-granted default right of revocation. UTC § 602(c) is a half-hearted attempt to address methodology. By providing that the trust may be revoked “by any … method manifesting clear and convincing evidence of the settlor’s intent,” however, it is essentially saying to equity: “You go figure it out; I cannot be bothered with the details.” In the pre-UTC days, the typical revocable inter vivos trust instrument contained a revocation clause that had two parts to it: The first part expressly reserved to the settlor the right to revoke or amend. The second part prescribed the method for revocation, such as by a writing that was signed by the settlor and delivered to the trustee, or what have you.

For a general discussion of the revocability of inter vivos trusts, see §8.2.2.2 of Loring and Rounds: A Trustee’s Handbook (2014), which is reproduced in its entirety here.